The US Securities and Exchange Commission (SEC) adopted Rule 10D-1 in October 2022, directing national securities exchanges to establish listing standards that prohibit the listing of any security of a company that does not adopt and implement a written policy requiring the recovery, or "clawback," of certain incentive-based executive compensation. The SEC required the exchanges to propose such listing standards no later than February 27, 2022. In keeping with that schedule, the NYSE clawback listing standards and Nasdaq clawback listing standards have each been proposed.
The NYSE proposed new Section 303A.14 of its Listed Company Manual to prohibit the initial or continued listing of any security of an issuer that is not in compliance with the requirements of any portion of such section. Nasdaq proposed setting forth the requirements of Rule 10D-1 in Listing Rule 5608. The listing standards proposed by both the NYSE and the Nasdaq closely align with the language of Rule 10D-1. The requirements of Rule 10D-1 are described in our previous Legal Update.
The proposed listing standards specify the applicable exchange's procedures for delisting in the event of non-compliance with the clawback requirements. For example, the NYSE proposed new Section 802.01F that provides that if it determines that a listed issuer has not recovered erroneously-awarded compensation as required reasonably promptly after such obligation is incurred, trading in all listed securities of such listed issuer would be immediately suspended and the NYSE would immediately commence delisting procedures with respect to all such listed securities. The NYSE's proposed Section 802.01F would also address late adoption of a clawback policy.
Nasdaq has proposed amendments to its Listing Rule 5810 to require a company that has failed to comply with Nasdaq's clawback requirements to submit a plan to regain compliance to Nasdaq staff. This proposed rule would allow Nasdaq staff to provide the issuer up to 180 days to cure the deficiency. Thereafter, Nasdaq staff would be required to issue a delisting letter.
Listed companies should begin, or continue, to prepare, clawback policies that comply with the requirements of Rule 10D-1. Both the NYSE and Nasdaq proposals contemplate a 21-day comment period once published in the Federal Register. It will take some time for the SEC and the exchanges to review comments, which could lead to revisions in the proposed listing standards. However, companies must be ready to put their policies in place within 60 days of effective date of the applicable listing standards.
The SEC's adopting release for Rule 10D-1 specified that the listing standards "must be effective no later than one year after November 28, 2022." That is the outside date. It is possible the effective date of the applicable listing standards could be sooner. The clock is running and with the publication of the NYSE and Nasdaq listing standards closely conforming to the substantive requirements of Rule 10D-1, listed companies have the tools they need to draft policies and consider corresponding language for award agreements so they will be in a position to adopt compliant policies in the required timeframe.
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